Can Transaction Fees Fully Offset Impermanent Loss for a Liquidity Provider?
Transaction fees, earned from trading volume, are the primary revenue stream for liquidity providers. They can, and often do, offset impermanent loss, especially in pools with high trading volume and low price volatility.
However, in scenarios with extreme price divergence, the impermanent loss can vastly exceed the accumulated fees, resulting in a net loss for the LP.
Glossar
Trading Volume
Liquidity ⎊ Trading volume represents the total quantity of an asset ⎊ be it a cryptocurrency, option contract, or derivative ⎊ exchanged within a given timeframe, typically expressed in units or monetary value.
Impermanent Loss
Exposure ⎊ Impermanent loss, a risk inherent in automated market maker (AMM) protocols and liquidity provision, arises from price divergence between assets deposited and their subsequent value upon withdrawal.
Transaction Fees
Fee ⎊ Transaction fees, inherent in cryptocurrency, options, and derivatives markets, represent the cost of executing trades and utilizing network infrastructure.